Tail Risk - Is It Part of Your Investment Framework?

[Gregmal]

1 hour ago, SharperDingaan said:

It's a much richer life taking on risk (love, adrenaline sports, etc.), than living under a rock hoping the sky doesn't fall.  

There isn’t a truer statement. That is the definition of “risk premium”, and why it always pays to be in the market, somewhere. 
 

Outperforming is about understanding and properly using leverage, and clipping a few points of downside here and there, not really all that complicated. Used to love the $40 VIX calls. Could quickly turn a 0.5% hedge into a 15% position redeemable for “CASH—->buy stonks” if you timed it right. And at that rate, you can be wrong 80% of the time and still winning.  

Edited March 26 by Gregmal

[LC]

Low energy post incoming (philosophically, does first class seating exist on Southwest Airlines, or is

it solely a figment within an airline pricing framework?):

 

Tail events exist on both tails.
 

I try to pick investments with greater exposure to right tail events and lower exposure to left tail events. 

[Gregmal]

11 hours ago, LC said:

Low energy post incoming (philosophically, does first class seating exist on Southwest Airlines, or is

it solely a figment within an airline pricing framework?):

 

Tail events exist on both tails.
 

I try to pick investments with greater exposure to right tail events and lower exposure to left tail events. 

This is a good point. For reasons I’m not privy to, Covid is often brought up as THE main example of “and then the market went down”. And it’s always left there, as if the story ended or something. The equivalent to watching an action movie and then shutting it off after something exciting happens in the first five minutes.

 

@dealraker always used to talk about how investing is often best left off being deduced to simplified things or by eliminating the amount of mistakes one can make. And that most mistakes are made by feeling the compulsive need to always “do something”. I think the expression he used to use was “people who always need to tally wins and losses” within the framework of short term moves. If I bought a stock today and tomorrow it’s up/down 2% that was the right/wrong move. Whereas the correct mindset is if you’re buying a stock today you shouldn’t be giving a shit. 
 

So back to Covid, I think in the proper perspective, at least post mortem analysis wise, is that it turbo charged existing trends, not a whole lot more. It pulled forward a lot of technology, it tipped the government hand re: spending, it highlighted that blue city investments were in a lot of trouble, it accelerated work from home, etc, etc. The story wasn’t “oh we had news and everyone was asleep…drumroll with dramatic music, AND THEN!!!  stocks crashed and never recovered! That’s just sooooo kind of intellectually flawed in terms of any sort of “lesson to be learned” in a historical sense. The bigger lesson really, which you can take back and apply to most recent events, including the GFC, is that if you’re properly invested, these events are your friend and especially if you are long term oriented and dollar cost averaging, certainly nothing to fear. 

[Gregmal]

The flip side too I guess, revolves around, what is the endgame on doing it the other way? Avoiding a short term blip? Do we start to play for this on the whim of a 5% top to bottom swing? 10%? Or do we spend an inproportionate amount of time preparing for events that occur every 5 years? 10 years? 20 years? If we re preparing for the later, isn’t there a pretty foolproof way to plan for that which doesn’t involve avoiding drawdowns at all but rather capitalizing on them? 
 

I mentioned the other day all the “concerns”(well a handful, too long a list for all) I’ve heard over the last 15 years. If we just narrow down to “and then the market went down” and the usual, cut it off there, nothing further your honor, we can still pull up a pretty solid handful of manic market moments since say 2015, string with the August “China crash”, and then the “Powell breathed about raising rates and the market collapsed” in 2018 or whatever, then Covid, the rate hikes, and again, isn’t the obvious conclusion that the “winners” didn’t get their knickers in a bunch and the “losers” may or may not have successfully avoided minor account statement discomfort at the expense of longer term benefits? Ill still always fondly remember that Bloomberg article about some dipshit short selling hedge fund manager who “redeemed himself” and got “retribution” in 2022 being short tech and long energy after losing like 80% of his AUM in the years prior. Only for this clown to learn ABSOLUTELY NOTHING and then get blown up again in 2023….
 

Just shit to think about. 

[SharperDingaan]

The left hand tail risk (great investment, not recognised) is visible to all, the right hand tail risk (utter sh1te, not recognised) is not; we just don't want to hear it.  

 

Example: Right after a utilities dividend is cut in 1/2; the stock will typically drop a good 40%+, in addition to the recent 25%+ decline to date. It's a scam!, can't trust the management!, will never touch this sector again!, gran/grandpa venting on their stupid decision!, yada, yada. When it is actually one of the best times to buy; the div yield will often be 6%+, and often a lot higher 5 years out as the utility tries to restore as  much of the 'cut' dividend as possible. The press will even give you the name in live time .... you will not even have to search for it . 

 

There are many other examples as well. In most every case one will have today's price, at least 5-10 yrs of historic financials, lots of drama ... and a number of potential paths out. However; crowd paralysis, and herd mentality ... will ensure the stock remains a tail risk, until somebody proves otherwise. When suddenly you're a hero.

 

These are great investments ..... if you can get out of your own way.

Not many people can.

 

SD

 

 

Edited March 26 by SharperDingaan

[Blake Hampton]

Every financial crisis is a crisis of confidence.

 

Financial systems, after all, are built on belief. That's why the word credit is derived from the Latin for believe, why we say we can "bank" on things we believe true, why financial institutions often call themselves "trusts." Think about how a traditional bank worked. Depositors entrusted it with their money, confident it could repay them with interest at any time. The bank then lent out their money at a higher interest rate, confident that everyone wouldn't want their money back at the same time. But when people lost confidence in a bank—sometimes because of rational concerns about its lending or leadership, sometimes not—they would all want their money back at the same time. The result was a run on the bank, like the famous scene in It's a Wonderful Life when depositors rush to pull their money out of a Depression-era savings and loan. Confidence is a fragile thing. When it evaporates, it usually evaporates quickly. And it's hard to get back once it's lost.

 

A financial crisis is a bank run writ large, a run on an entire financial system. People lose confidence that their money is safe—whether they're stockholders or bondholders, institutional investors or elderly widows—so they rush to pull it out of the system, which makes the money remaining in the system even less safe, which makes everyone even less confident. This has happened a lot throughout history, in rich countries and poor ones, in sophisticated systems and simple ones. Human beings are prone to panics, just as we are prone to the kind of irrational confidence (in real estate, or stocks, or seventeenth-century Dutch tulips) that produces the booms that precede panics. And once the stampede begins, it becomes rational for individuals to join it to avoid getting trampled, even though their collective actions are irrational for society as a whole. These panics almost always have brutal consequences—for teachers and construction workers, not just investors and bankers—and policymakers almost always make them worse.

 

— Timothy Geithner, Stress Test: Reflections on Financial Crises

[DooDiligence]

Didn't know where to put this, but here seems right.

I really like this guy. H/T to @gfp for tipping us all to him.

 

https://irrationalanalysis.substack.com/p/its-just-money-its-made-up?

[gfp]

6 hours ago, DooDiligence said:

Didn't know where to put this, but here seems right.

I really like this guy. H/T to @gfp for tipping us all to him.

 

https://irrationalanalysis.substack.com/p/its-just-money-its-made-up?

 

haha, just finished reading that from my morning email before coming over here.  Spoiler alert if you haven't seen Margin Call lol

 

Irrational Analysis is great.  I always get a kick out of it, even when the technical content is way over my head - which is very often

[DooDiligence]

6 minutes ago, gfp said:

 

haha, just finished reading that from my morning email before coming over here.  Spoiler alert if you haven't seen Margin Call lol

 

Irrational Analysis is great.  I always get a kick out of it, even when the technical content is way over my head - which is very often

 

Same, regarding the technical stuff. I'm hoping the more you read, the more you understand, but electrical engineering ain't like learning about heart valves and peptides.

[Spooky]

On 4/5/2026 at 6:31 AM, DooDiligence said:

Didn't know where to put this, but here seems right.

I really like this guy. H/T to @gfp for tipping us all to him.

 

https://irrationalanalysis.substack.com/p/its-just-money-its-made-up?

 

This was awesome, cudos to the author for having more ethical integrity than 99% of the industry. Some of the points in the article resonated with me like his discipline on managing lifestyle creep. Going back to the discussion at hand, tail risk is always prevalent and I don't think that you can reliably predict when or what will occur, it can be a black swan event. So you have to invest in a way to survive these events but still harvest the ~6% real returns for owning equities over the long run. As Taleb would say: anti-fragile. The crux of the issue is really: 1) own companies that will survive anything that is thrown at them; and 2) never be a forced seller (being able to capitalize on these dislocations like Buffett is a bonus, but is not strictly required over the very long run). 

 

I agree with Viking that the way you approach this depends on what stage of life you are in. For me, at the moment I have ~99% of my wealth invested in equities. However, I really don't care about volatility at all and have set up a few ways to mitigate the downside: I have no debt and don't use margin; I rent my place so worse case scenario I can give 60 days notice and I am out of there; I am disciplined on my financial expenses and avoiding lifestyle creep; and I have a small emergency fund and access to undrawn credit. I also take a different lens when evaluating companies to own, inverting and focusing on the risk of a permanent loss of capital. As I get older I am gravitating more towards just broad based global equity ETFs. 

 

 

[73 Reds]

18 minutes ago, Spooky said:

 

This was awesome, cudos to the author for having more ethical integrity than 99% of the industry. Some of the points in the article resonated with me like his discipline on managing lifestyle creep. Going back to the discussion at hand, tail risk is always prevalent and I don't think that you can reliably predict when or what will occur, it can be a black swan event. So you have to invest in a way to survive these events but still harvest the ~6% real returns for owning equities over the long run. As Taleb would say: anti-fragile. The crux of the issue is really: 1) own companies that will survive anything that is thrown at them; and 2) never be a forced seller (being able to capitalize on these dislocations like Buffett is a bonus, but is not strictly required over the very long run). 

 

I agree with Viking that the way you approach this depends on what stage of life you are in. For me, at the moment I have ~99% of my wealth invested in equities. However, I really don't care about volatility at all and have set up a few ways to mitigate the downside: I have no debt and don't use margin; I rent my place so worse case scenario I can give 60 days notice and I am out of there; I am disciplined on my financial expenses and avoiding lifestyle creep; and I have a small emergency fund and access to undrawn credit. I also take a different lens when evaluating companies to own, inverting and focusing on the risk of a permanent loss of capital. As I get older I am gravitating more towards just broad based global equity ETFs. 

 

 

@Spooky however you choose to invest, it all comes down to confidence and results to back it up.  Never heard of the author before but it was a fun read and his M/O works for him.  

[DooDiligence]

18 minutes ago, Spooky said:

 

This was awesome, cudos to the author for having more ethical integrity than 99% of the industry. Some of the points in the article resonated with me like his discipline on managing lifestyle creep. Going back to the discussion at hand, tail risk is always prevalent and I don't think that you can reliably predict when or what will occur, it can be a black swan event. So you have to invest in a way to survive these events but still harvest the ~6% real returns for owning equities over the long run. As Taleb would say: anti-fragile. The crux of the issue is really: 1) own companies that will survive anything that is thrown at them; and 2) never be a forced seller (being able to capitalize on these dislocations like Buffett is a bonus, but is not strictly required over the very long run). 

 

I agree with Viking that the way you approach this depends on what stage of life you are in. For me, at the moment I have ~99% of my wealth invested in equities. However, I really don't care about volatility at all and have set up a few ways to mitigate the downside: I have no debt and don't use margin; I rent my place so worse case scenario I can give 60 days notice and I am out of there; I am disciplined on my financial expenses and avoiding lifestyle creep; and I have a small emergency fund and access to undrawn credit. I also take a different lens when evaluating companies to own, inverting and focusing on the risk of a permanent loss of capital. As I get older I am gravitating more towards just broad based global equity ETFs. 

 

 

 

Largely the same here. I'm debt free and maintain a large cash buffer to avoid being a forced seller. Where I depart from wisdom is in having a concentrated portfolio with three names that I convince myself I understand but in reality don't. I plan on fixing this over the next decade if luck hands me some wins. My highest conviction investments are Berkshire and my home. I believe that if everything else went to shit, these two assets would see me through.

[Malmqky]

On 4/5/2026 at 1:31 AM, DooDiligence said:

Didn't know where to put this, but here seems right.

I really like this guy. H/T to @gfp for tipping us all to him.

 

https://irrationalanalysis.substack.com/p/its-just-money-its-made-up?

 

I love this guy.

 

"The point of this account is to have fun, feed massive ego/narcissism, and compete publicly. This chart says “I know more about semiconductors than you.” It proves that I am winning and (more importantly) others are losing."

 

> public substack, full transparency, doesn't do consulting, legitly doesn't care much about the money, does it simply for the love of the game.

[DooDiligence]

2 hours ago, Malmqky said:

 

I love this guy.

 

"The point of this account is to have fun, feed massive ego/narcissism, and compete publicly. This chart says “I know more about semiconductors than you.” It proves that I am winning and (more importantly) others are losing."

 

> public substack, full transparency, doesn't do consulting, legitly doesn't care much about the money, does it simply for the love of the game.

Yep. Insanely smart too.

[Castanza]

On 3/27/2026 at 4:51 PM, Blake Hampton said:

Every financial crisis is a crisis of confidence.

 

Financial systems, after all, are built on belief. That's why the word credit is derived from the Latin for believe, why we say we can "bank" on things we believe true, why financial institutions often call themselves "trusts." Think about how a traditional bank worked. Depositors entrusted it with their money, confident it could repay them with interest at any time. The bank then lent out their money at a higher interest rate, confident that everyone wouldn't want their money back at the same time. But when people lost confidence in a bank—sometimes because of rational concerns about its lending or leadership, sometimes not—they would all want their money back at the same time. The result was a run on the bank, like the famous scene in It's a Wonderful Life when depositors rush to pull their money out of a Depression-era savings and loan. Confidence is a fragile thing. When it evaporates, it usually evaporates quickly. And it's hard to get back once it's lost.

 

A financial crisis is a bank run writ large, a run on an entire financial system. People lose confidence that their money is safe—whether they're stockholders or bondholders, institutional investors or elderly widows—so they rush to pull it out of the system, which makes the money remaining in the system even less safe, which makes everyone even less confident. This has happened a lot throughout history, in rich countries and poor ones, in sophisticated systems and simple ones. Human beings are prone to panics, just as we are prone to the kind of irrational confidence (in real estate, or stocks, or seventeenth-century Dutch tulips) that produces the booms that precede panics. And once the stampede begins, it becomes rational for individuals to join it to avoid getting trampled, even though their collective actions are irrational for society as a whole. These panics almost always have brutal consequences—for teachers and construction workers, not just investors and bankers—and policymakers almost always make them worse.

 

— Timothy Geithner, Stress Test: Reflections on Financial Crises

Curious… as we approaches atm again did you make any portfolio changes or take advantage of the volatility? 

[Gregmal]

Well, the SPY is up ~7% in the three weeks since this thread was started. Be greedy when others are fearful I guess. Whatdayasay Blakeypoo?

[Parsad]

39 minutes ago, Gregmal said:

Well, the SPY is up ~7% in the three weeks since this thread was started. Be greedy when others are fearful I guess. Whatdayasay Blakeypoo?

 

Stop baiting Greg!  You can say the same thing without being a dick.  Cheers!

[Gregmal]

1 hour ago, Parsad said:

 

Stop baiting Greg!  You can say the same thing without being a dick.  Cheers!

Yea but at some point it’s helpful for them. I mean how many times now, on a semi regular basis, do we need to see these same things play out? And there’s always just so much conviction and cockiness seemingly at or near the bottoms, about “cash is king” and “this is only the beginning”….its just soooo detrimental to the entire idea and complex of being a successful investor. So…maybe humility thru humiliation is worth a try!

[Parsad]

1 minute ago, Gregmal said:

Yea but at some point it’s helpful for them. I mean how many times now, on a semi regular basis, do we need to see these same things play out? And there’s always just so much conviction and cockiness seemingly at or near the bottoms, about “cash is king” and “this is only the beginning”….its just soooo detrimental to the entire idea and complex of being a successful investor. So…maybe humility thru humiliation is worth a try!

 

No, that's fine.  I mean the "Blakey-poo" stuff.  You can leave that out.  Cheers!

[Parsad]

2 minutes ago, Gregmal said:

Yea but at some point it’s helpful for them. I mean how many times now, on a semi regular basis, do we need to see these same things play out? And there’s always just so much conviction and cockiness seemingly at or near the bottoms, about “cash is king” and “this is only the beginning”….its just soooo detrimental to the entire idea and complex of being a successful investor. So…maybe humility thru humiliation is worth a try!

 

Also, I don't think I've ever gotten through to anyone with humiliation.  It almost always has the opposite effect. 

 

Look at the Frankenstein's monster and shitshow that Obama's jokes at the Correspondent's Dinner caused!    Cheers!

[Gregmal]

15 minutes ago, Parsad said:

Look at the Frankenstein's monster and shitshow that Obama's jokes at the Correspondent's Dinner caused!    Cheers!

Blake for President then? I could live with that!

[Hektor]

11 hours ago, Parsad said:

Also, I don't think I've ever gotten through to anyone with humiliation.

+1

[LC]

I think the better way to frame it is: 

 

Unless you personally manage many, many billions, then there is always attractive in the market to purchase, it's just a matter of finding it. 

 

Is it harder to find in a frothy market? Sure, maybe.

But to imply that there is nothing investable out there is a problem that only a handful people globally will ever have, and we sure ain't them!

[Spooky]

2 hours ago, LC said:

Unless you personally manage many, many billions, then there is always attractive in the market to purchase, it's just a matter of finding it.

 

I agree with that. Given the size of portfolios people on the board have (with some exceptions I'm sure), there is probably always something attractive to do. My view is ABB: Always Be Buying.

[Castanza]

Shit...my constraint is generally not enough capital to invest...I'll be damned if I'm going to take my meager FCF and put it into t-bills at 4%...